Like Russia, it offered a well-educated work force at wages one tenth of what the company was paying in Finland. Unlike Russia, law and order ruled. What’s more, Finns and Estonians shared a culture. As part of the tiny Finno-Ungric language group, they could actually talk to each other. And Estonia was practically next door. Its capital, Tallinn, lies just 60 kilometers from Helsinki, a short ferry ride or plane hop across the Baltic Sea.
So it was that Elcoteq made the move–and has since become the largest electronics company of its type in Europe, numbering Ericsson and Nokia among its customers. As for Estonia, it is today one of the top three foreign-investment draws, per capita, in Eastern Europe, after Hungary and the Czech Republic. It aggressively remade itself into a partner of the West, morphing from communism to democracy and becoming, among other things, the first former Soviet satellite to allow full foreign ownership of Estonian businesses. That “big bang” makeover was a “breakthrough moment,” one American investor in the region recalls. It put Estonia on the map of Europe’s most promising new places to do business.
Swedes followed the Finns, who have in turn been followed by the Americans, the Dutch, the Danes and the Germans. And from there investment flowed on to the other Baltic States, Latvia and Lithuania, and then to northern Poland. Even Russia, under the steadying hand of Vladimir Putin, looks like a better bet than it used to. St. Petersburg, Russia’s erstwhile window to the West, is bustling with new energy, new money and, most important, new attitudes about its importance and place in the wider world. No longer is it the down-at-heel little sister to Moscow. Today it’s on its way to becoming the eastern anchor to an emerging regional commercial trading zone, stretching as far as Hamburg and Copenhagen to the west, Oslo and Stockholm to the north.
As if all this were not enough, the Baltic Sea region is set to take another great leap forward. The coming eastward enlargement of the European Union, certain to include both the Baltics and Poland, promises to usher in a new era of dynamism and economic growth. NATO, too, may soon expand, bringing new strategic realignments. And consider this testament to the region’s fundamental health: despite the global downturn, the three Baltic States compose one of the world’s fastest-growing economic zones. Perhaps inevitably, some describe what’s happening as the emergence of a “new Hong Kong”–or, more aptly, a new Hanseatic League, a post-cold-war reincarnation of the mercantile monopoly that dominated Baltic trade in the Middle Ages.
Sheer size and geography bode well for such dreams. The greater Baltic region has a population of more than 90 million and a GDP nearly one third of Japan’s. To the west lie the vast markets of Western Europe. To the east beckons the vast promise of a Russian market–150 million people across 11 time zones. Long gone are the days when the Baltic Sea, like a castle’s moat, kept the Soviet empire and the West apart. “The Baltic Sea is no longer water that divides,” Swedish Trade Minister Leif Pagrotsky told NEWSWEEK. “It’s water that unites.”
All this comes on the heels of an extraordinary decade of transformation. Following the collapse of the Soviet Union in 1991, the Baltic States reinvented themselves as gung-ho free marketers. Unlike Russia, the Baltics over the past 10 years established themselves as fiscally reliable and politically stable safe havens for foreign investment. At the same time the IT and the telecommunications revolutions were transforming the Baltics’ Nordic partners, especially Sweden and Finland. As export powerhouses, both these countries were looking for markets. The Baltics themselves, with a combined population of only 7.4 million, are not much in terms of consumers. But as a low-cost base for production and transportation, they made an excellent bridge to much bigger markets.
The size, shape and economic clout of the region will change dramatically in coming years. Stockholm is now the de facto capital of the region, but by default. Germany, Europe’s largest economy, has played a smaller role than its history and economic weight would suggest. That’s because it has been preoccupied with other matters: tending to its own economic problems, absorbing the broken economy of what was East Germany and investing heavily in Poland, Hungary and the Czech Republic. Carl Fredriksson of EuroFutures, a Stockholm-based think tank, says he expects that within a decade or so, Berlin will emerge as the region’s rightful capital. Germany, after all, is the champion of EU eastward expansion. The rich German port of Hamburg, long a Baltic power, is also expected to grow in importance as a western anchor to the Baltic region. There’s even talk of an ambitious new bridge-and-tunnel project that would cut the travel time between Copenhagen and Hamburg in half. As it is, the Denmark-Sweden Oresund link, which opened in 2000, has been a major step in improving freight and passenger traffic in the Baltic.
The westernization of the former-Soviet-bloc states on the shores of the Baltic is not just economic. Liberated, these societies swept out tired ideologies and ushered in transformational cultural and technological innovations. Countries reinvented themselves, socially as much as politically. Estonia became “the little country that could,” according to Paul Oberschneider, an American who came to Tallinn a decade ago and now owns a regional real-estate company. Almost overnight it turned itself into Estonia–an Information Age wunderkind that leapfrogged from technology backwater to tech pacesetter, complete with the world’s first “paperless” government and one of Europe’s most IT-friendly citizenries. There are also the pluses and minuses of rising affluence. In Vilnius, Lithuania, you can get mandarin oranges from Morocco at any number of new supermarkets. On the downside, there’s the traffic in Soviet-planned cities not meant for so many cars. “It takes two hours to get from one side of Riga to the other during rush hours,” says Alexander Krasnitsky, a journalist in the Latvian capital. “The planners did not take into account that every third family now has a car.”
The “twin cities” dynamic between Helsinki and Tallinn explains a lot about the economic and social evolution of the region. The pair are close enough to be suburbs. The hourly Copterline helicopter commute takes 18 minutes. As the Winter Olympics demonstrated, Finns and Estonians share a love and prowess for the same grueling sports. But for half a century Estonia was part of the Soviet Union and cut off from Finland and the West. One of the very few vistas into the West was Finnish television, which Estonians could pick up; they called it their “prison window.” When the U.S.S.R. dissolved, Estonia was probably its most prosperous enclave. Wages, nonetheless, were vastly lower than in Finland, and though they’ve risen in the past decade, they remain about one sixth of what they are across the water.
Foreign companies found the low wages irresistible in the past, and they still do. But the investment rationale is not just cheap labor. Tallinn is a pleasant, cosmopolitan city with an outstanding medieval district of cobbled streets, unspoiled architecture and an active nightlife with a lively bar scene and fine restaurants. Like other Soviets, Estonians benefited from a good education in math and the sciences. Companies that invest there reap those rewards as well. Of Elcoteq’s 2,048 plant workers in Tallinn, a remarkable 466 have university degrees.
As the refurbishing of old merchant mansions in Tallinn attests, the Baltic Sea region today is in some ways going back to its roots. “Fifty years of communism merely interrupted what had been a market for 500 years,” says Kai Hammerich, director general of the Invest in Sweden Agency. Merchants of the German-dominated Hanseatic League, richer and more powerful than nobility in their day, monopolized commerce in northern Europe from the 13th to the 15th centuries. Trading in metals and fur, timber and flax, they left their footprints all around the region, including the architectural opulence of Tallinn’s Old Town and churches in Stockholm and Helsinki where services are still in German.
But what’s happening now is also very 2002. Whereas the Hanseatic League was aggressively protectionist, today the free market rules in the Baltics. In fact, Estonia–with virtually no tariffs, low corporate taxes and a flat personal income tax of 26 percent–may have to de-liberalize its tax and tariff regime in order to join the EU. This is a source of some bemusement in Tallinn–and no small irony, considering that many Westerners rather condescendingly consider the Easterners to be aspirants to their more “modern” world. “This country really gets the global economy,” marvels a diplomat in Tallinn. “Now they’re going to turn back the clock.”
Estonia is happy to tinker with its economy in order to meet its longer-term goals of EU membership and benefit from the competitive environment of the global economy. The same is true in Lithuania. “In the 14th and 15th centuries, Lithuania was a great power in Europe, and they remember that,” says a Western diplomat in Vilnius. “They feel like they never really belonged to the Soviet Union. That history drives them into the modern era. It seems like part of their destiny.” Fate has not always been kind to the countries huddled around the Baltic Sea. But the lesson of the past decade is that, given a chance, countries can sometimes make their own luck.
